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Energy Intelligence Group, Inc.: BP-Shell Rumors Revive Concept Of Megamergers

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(Copyright © 2007 Energy Intelligence Group, Inc.)
Monday, May 28, 2007

Rumors of a possible tie-up between BP and Royal Dutch Shell have some analysts talking about a new era of megamergers, but is such a scenario plausible?

Roughly five years after the original round of megadeals, the supermajors find themselves struggling to grow output and replace reserves as a result of resource nationalism and limited upstream access. A new wave of consolidation might seem like the answer, but there would be major obstacles, most notably from politicians irate about record oil and gas prices and fearful they erred in clearing the last round of deals.

The merger of Conoco and Phillips in 2002 effectively culminated the first period of mega-deals, which began in 1998 with BP’s acquisition of US Amoco. The value of upstream reserve transactions hit a record $122 billion in 1998, a level beaten in 2006 only because of the impact of skyrocketing commodity prices on reserve valuations. This and other trends are visible in PIW’s latest annual tally of mergers and acquisitions.

BP and Shell have each had their share of problems in recent years, leading to a massive shortfall in their market capitalizations versus US rival Exxon Mobil. A combination of BP, with a market cap of $220 billion, and Shell, valued at $245 billion, would almost match Exxon’s $467 billion market value and create a legitimate European counterweight to the Texas-based giant. Indeed, analysts argue a combined BP-Shell would have a substantial operational edge over Exxon in the upstream, downstream, midstream and fast-growing LNG market.

While BP and Shell are saying nothing, some analysts are openly match-making, even arguing the companies have been divesting certain assets that antitrust regulators might find troublesome if they merged, such as Shell’s 100,000 barrel per day Los Angeles refinery, BP’s Cushing, Oklahoma, pipeline network, and its 172,000 b/d UK Coryton refinery. BP-Shell would have oil production of 4.4 million b/d, versus 2.7 million b/d for Exxon; gas production of 17.5 billion cubic feet per day, versus 10.1 Bcf/d for Exxon; and oil product sales of 12.2 million b/d, versus 7.2 million b/d for Exxon.

The portfolios of BP and Shell are considered quite complimentary — Shell has a huge position in Canadian oil sands, where BP is absent, while BP is a major player offshore Angola, where Shell lags significantly. The recent unification of Shell’s stock structure also removes another obstacle to a possible merger.

But how would a $465 billion oil merger look to politicians in Washington or Brussels against a backdrop of record-breaking oil and gas prices?

The general public views Big Oil as one of the top contributors to high prices, and legislators are taking a hard look at the market impact of past and present mergers, with US regulators recently blocking a relatively small merger between two refiners. Retail gasoline prices hit record levels of more than $3 per gallon even before the start of the peak summer driving season in the US, but testimony from high-ranking government officials before a Congressional committee last week downplayed consolidation in the oil industry over the past decade as a major factor behind higher pump prices — indeed, efficiencies gained through mergers have actually kept prices from going higher, one US Federal Trade Commission (FTC) official argued.

Even so, the FTC is trying to block the merger of US independent refiners Western and Giant due to concerns about market concentration in New Mexico (PIW Apr.16,p12). A combined BP-Shell would have less US refining capacity than Valero or ConocoPhillips.

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